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The Department of Defense (DOD) has increasingly relied on reserve personnel to carry out its military operations. Congress and DOD have taken steps to enhance reserve compensation, such as improving health care benefits. Concerns exist, however, that rising compensation costs may not be sustainable in the future, especially given the nation's large and growing long-range fiscal imbalance. Under the statutory authority of the Comptroller General to conduct work on his own initiative, GAO (1) reviewed how much it has cost the federal government to compensate reserve personnel since fiscal year 2000; (2) assessed the extent to which DOD's mix of cash, noncash, and deferred compensation has helped DOD meet its human capital goals; and (3) evaluated the extent to which DOD's approach to reserve compensation provides transparency over total cost to the federal government. To address these objectives, GAO analyzed budget data and relevant legislation and also interviewed appropriate officials. GAO focused this review on part-time reservists and full-time, active guard and reserve.

Using fiscal year (FY) 2006 constant dollars, the federal government's total cost to compensate part-time and full-time reserve personnel has increased 47 percent since FY 2000, rising from about $13.9 billion in FY 2000 to about $20.5 billion in FY 2006. Most reservists are part-time, and their per capita compensation costs nearly doubled from about $10,100 in FY 2000 to about $19,100 in FY 2006. Additionally, a small percentage of reservists work full-time, and their per capita costs increased about 28 percent from FY 2000 to FY 2006. Cash compensation, which servicemembers see in their "paycheck," has increased about 19 percent. However, much of the total growth in compensation is driven by the costs for deferred compensation. These costs tripled over this period, primarily attributed to enhanced health care benefits. Moreover, DOD officials anticipate significant continued growth in health care costs because of the expansion of health care coverage to reserve personnel in FY 2007. DOD does not know the extent to which its mix of pay and benefits meets its human capital goals in part because it lacks an established compensation strategy to identify the appropriate mix of reserve compensation to maintain its force. DOD and Congress have added pay and benefits using a piecemeal approach that has not been based on an established strategy and that has not adequately considered the appropriateness, affordability, and sustainability of the related costs. These additions have contributed to a shift in the mix of compensation toward more deferred benefits--that is, future compensation such as retirement pay and health care for life. Deferred benefits increased from 12 percent of total reserve compensation in FY 2000 to 28 percent of total compensation in FY 2006. This increase in deferred compensation may not be the most efficient allocation given that fewer than one in four of those who join the reserve will ultimately earn nondisability retirement pay and health care for life. Moreover, DOD does not know the efficiency and effectiveness of these changes in meeting its recruiting and retention goals because it does not have performance measures. Without performance measures, DOD cannot determine the return on its compensation investment or make fact-based choices on how its compensation resources should be allocated. DOD's approach to reserve compensation does not provide decision makers in Congress and DOD with adequate transparency over total cost for reservists--including the allocation of costs to cash, noncash, and deferred compensation, as well as the cost for mobilized reservists. Despite the fact that sound business practices require adequate transparency over investments of resources, currently costs are found in multiple budgets within three federal departments. Until total reserve compensation costs are compiled in a transparent manner--and decisions are based on established compensation strategies--decision makers will be unable to determine the affordability, cost effectiveness, and ultimately the sustainability of the reserve compensation system. Increased transparency is especially important given the growing fiscal challenges the country faces.

Matter for Congressional Consideration

Status: Closed - Not Implemented

Comments: Congress has not taken action.

Matter: As future changes are considered to pay and benefits for National Guard and reserve personnel as well as veterans, Congress may wish to consider the long-term affordability and sustainability of these changes, including the long-term implications for the deficit and military readiness.

Recommendations for Executive Action

Status: Closed - Not Implemented

Comments: DOD partially concurred with this recommendation. The Department noted it has been consistent in its compensation strategy and approach to compensation, with priority on cash compensation and emphasizing discretionary authorities to help shape and manage the force. DOD officials stated that this strategic approach has been consistently communicated to Congress in the form of both oral and written Congressional testimony. Additionally, DOD officials noted that the Department has sponsored multiple efforts to assess the overarching military personnel compensation strategy including the Defense Advisory Committee on Military Compensation (DACMC) and the 10th Quadrennial Review of Military Compensation. We acknowledge that the Department has taken actions to assess aspects of military compensation, but believe these actions do not meet the intent of the recommendation. DOD has yet to develop an explicit compensation strategy and performance measures. We maintain that this recommendation continues to have merit and is an important step that should be taken by the Department.

Recommendation: To improve the appropriateness of the reserve compensation system and to gain transparency over total reserve compensation costs, the Secretary of Defense should establish a clear compensation strategy that includes performance measures to evaluate the efficiency of compensation in meeting recruiting and retention goals, and use the performance measures to monitor the performance of compensation and assess what mix of compensation will be most efficient in the future.

Agency Affected: Department of Defense

Status: Closed - Not Implemented

Comments: The Department of Defense agreed with the recommendation to improve transparency over the total cost for Reserve compensation but believed the Office of Management and Budget (OMB) was in the best position to provide this information considering the costs of compensation extend across multiple departments. DOD has been working with OMB to include this information in the OMB publication, Analytical Perspectives: Budget of the U.S. Government. However, in May 2010, DOD stated that in conjunction with the upcoming Eleventh Quadrennial Review of Military Compensation (QRMC), the Department is evaluating the feasibility and value of compiling a total cost of military compensation display to inform the review and for subsequent publication.

Recommendation: To improve the appropriateness of the reserve compensation system and to gain transparency over total reserve compensation costs, the Secretary of Defense should compile the total costs to provide reserve compensation for part-time, full-time, and mobilized reservists and communicate these costs as well as the allocation of these costs among cash, noncash, and deferred compensation to decision makers within the administration and Congress--perhaps as an annual exhibit as part of the President's budget submission to Congress.